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Tax Avoidance vs. Tax Evasion

I saw a response to my Taxes in Israel II post by “Kalashnikover_Rebbe” on Hashkafa.com:

I was actually almost in this situation (in the end I didn’t end up working so it was irrelevant). I would just “neglect to inform” the Israeli government about that income and pay the MUCH lower US taxes. But ideally I would as [sic] the company to pay me as a “foreign Israeli national” thereby being exempted of paying US taxes as well and just being careful not to allow the Israeli tax authorities to notice the money (like not regularly deposit large amounts in an Israeli bank account)…

Most check cashing places take 1.5%, a LOT less than either the US or Israel would take out…..

To paraphrase: Thus individual would break the law by lying to the Israeli government about his current status of being employed (since in Israel, you are currently taxed on global income). That is how I would classify “neglecting to inform” the government, especially when you take measures like avoiding regular deposits of large sums, in order not to be noticed by Mas hachnassah.

Also, he would do some income tax evasion by not reporting his income to the IRS (though I do not understand the whole “foreign Israeli national” scheme, since as a US citizen, you are obligated to file a tax return on your income no matter where you live - I don’t see how such a status would exempt you from paying US taxes, unless he is just referring to Social Security and Medicare. If that is the case, and he is in fact a US citizen, it is still against the law).

And why are you paying 1.5% on check cashing? Cheerfully Changed is 1% (and free for wire transfers, though since this might leave more evidence against you, you would probably avoid it).

Unfortunately, “Kalashnikover_Rebbe” is not alone in his enthusiasm for tax evasion in Israel (and the US). As you can tell above, I am not supportive of this approach. There are legal ways to exempt yourself from paying certain categories of taxes in both the US and Israel (tax avoidance, as I have attempted to detail in a couple of previous posts), just as there are illegal ways (tax evasion). To each his own…

This entry was posted on May 16th, 2008 at 9:34 by Yaakov and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “Tax Avoidance vs. Tax Evasion”

Andrew Says:
September 24th, 2008 at 23:00

I think he was partially talking about tax avoidance.

Even though U.S. citizens living in Israel are required to file a tax return for both the U.S. and Israel, U.S. citizens are entitled to a waiver of a significant portion of U.S. taxes of foreign income, earned via the foreign income exclusion if they are domiciled outside the U.S. for at least 330 days a year and. Currently it is a little more than $85,000 that is exempt.

Furthermore, the U.S.-Israeli tax treaty allows one to take credits on taxes paid in one country against the other. In other words, if you owe the U.S. $10,000 in taxes and Israel $15,000 in taxes and you paid Israel the $15,000, the U.S. will credit you as have paying them $15,000 in taxes, thus it is pretty hard to get double taxed (unless one fails to file an income tax return–rhen one usually forfeits the benefits if caught/audited.)

One other point few people know of is the requirement to file Foreign Bank and Financial Accounts (FBAR) report separate from your tax return every year if you are a U.S. citizen with an Israeli bank account with at least $10,000 in it at any point during a fiscal year.

See: http://www.irs.gov/businesses/small/article/0,,id=148845,00.html

Yaakov Says:
September 25th, 2008 at 8:12

Andrew - I don’t think he was talking about tax avoidance. We have two types of taxes, US and Israel. For US he wants to “pay the MUCH lower US taxes”. For Israel - “I would just “neglect to inform” the Israeli government about that income”.

So his plan would be to evade taxes in Israel while still paying taxes in the US.

It is true, like you said, if you are paying taxes in Israel, you can use this as a credit against your US tax return. I did this, and since I pay 2.5 times as much tax in Israel than in the US, it wiped out all of the US tax that I owed. However, that is not what he is proposing. He wants “the company to pay me as a “foreign Israeli national” thereby being exempted of paying US taxes as well”. At the same time, he would “just being careful not to allow the Israeli tax authorities to notice the money”. In other words, he would evade taxes from both countries (US evasion because if you maintain your US citizenship, you have to declare it as a US citizen on your US tax return. Israel evasion should be obvious).

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